This article has been written by Surabhi Gupta, pursuing a Diploma Programme in Cyber Law, FinTech Regulations and Technology Contracts from LawSikho.

Introduction

Online contracts, also known as electronic contracts or e-contracts, refer to the agreements that are created and signed electronically which does not involve the use of paper or hard copy.  It’s a fast and convenient way for organizations and individuals to enter into legally binding agreements with other parties. An electronic contract, according to Section 10-A of the Information Technology Act, 2000, is valid and enforceable.

According to Section 10-A of the Information Technology Act, 2000, when in the process of contract formation, communication of proposal, acceptance of proposal and revocation of proposals and acceptance as the case may be are expressed in electronic form or by means of an electronic form will be deemed to be valid and enforceable. The Electronic Commerce Act, 1998 has also been sanctioned by the Parliament for the purpose of managing the issue of electronic contracts. This Act has laid the fundamental principles of Electronic contracts which are as follows:

1. There should be a finished solid electronic record.
2. It must be a secured electronic record.
3. There should be a finished dependable electronic mark. 
4. There should be a communication of electronic operators that affirms or demonstrates.

Various types of online contracts 

Browse wrap agreements

It’s a kind of search cover agreement that is meant to be binding on the contracting parties through the use of a website. It refers to the set of terms, which is accessible via a hyperlink located on the pages of a website. These include website access policies, terms of service in various websites like Flipkart or Myntra and are usually available in the form of a “user agreement”, “service terms” or “use terms”. 

Shrink-wrap agreements

It refers to the licensing agreements by which the terms and conditions of the contracts are imposed on the contracting parties that accompany the software product that the customer purchases. It is commonly present on the plastics or in manuals along with the products and can be viewed only when the customer opens it and views the product and hence the shrink-wrap agreements. 

Its terms and conditions cannot be read unless the customer has accepted and paid for the package. It generally includes specific terms and conditions of the product or purchase, such as the price of products, warranties, right of use and guideline, limitations and licenses as the case may be.

Click-wrap agreements

Refers to the process wherein the consumer gives assent to the terms by:

1. By clicking on an icon, for instance, the icon titled “I agree” after presenting to the user other terms and conditions. 
2. Affirmatively acknowledging the agreement before proceeding with the use of the website.

This contract lacks bargaining power and it is known as the take-it or leave-it contract. It is a type of agreement that is broadly utilized by online exchanges and programming licenses in which a customer is bound to accept the terms and conditions before using the item or the administration. 

 Online contracts, also known as electronic contracts, carry with it inherent risks which must be mitigated in order to avoid any kind of conflict in future. Some of the risks involved in electronic contracts are:

1. Firstly, it is very difficult to determine the exact point of time when the contract was made. This can be avoided by including clear provisions in the contractual offer specifying the manner of acceptance to be communicated and the time when an acceptance of the offer will be deemed to be effective. 
2. Secondly, breach of confidentiality of the documents is more widespread as copying and distribution of electronic records become easy. In fact, infringement of Intellectual Property is also more common and widespread because of sharing of drawings and plans electronically. The risk of leakage of confidential information is higher when the transfer and establishment of contractual documents is done with the help of mails without using appropriate encryption technology for encrypting the email messages. It is also possible that unauthorized personnel might get access to user credentials which can be a huge risk.  Prior to the contract execution, one must address the inherent risks in the contracts through representation, warranty, default, and allocation of risk clauses.

Steps for evaluating risks in online contracts

An electronic contract refers to an agreement or understanding made within an electronic frame in which no paper or other printed parties are utilized. Apart from these, there are various other ways by which risks inherent in online contracts can be evaluated and properly addressed and mitigated. They are as follows:

Creating transparency

Lack of transparency gives rise to risks like loss of revenue, errors in contract clauses and an increase in costs. Transparency ensures that unambiguous and vague language is replaced by clear, specific and concise and agreed-upon language. 

It also includes clearing up any kind of misunderstandings as to how the terms are used by creating a clear definition of the key terms. Each and every risk scenario must be identified and then clearly defined for your business and the place where the risks can originate that is from a third party or from the point of regulatory compliance. Ensuring transparency is one of the foundations of risk mitigation as it ensures that fraudulent and corrupt behaviour goes unnoticed.

Reviewing the contract

Reviewing the contract tends to clear any kind of misunderstandings and removes ambiguity from the language making it clear and unambiguous so that everyone is on the same page. To avoid any kind of risks, important clauses can be reviewed.  

The technical scope of the services must be evaluated

One has to identify whether the scope of the services anticipated falls within the standard of the firm’s technical expertise to ensure that the operations team is able to deliver those services whether through subcontracting to a third party or in-house. The scope should also be reviewed by the team to ensure that it is clear, reasonable and fully defined. The team should also acquire information as to whether any grey areas exist in the scope. 

Artificial Intelligence must be used to identify the risks proactively

Software like intelligent contract management software can alert the team. Contract management software also allows you to control access and delegate while tracking documents throughout their lifecycle. The machine learning tools and the integrated Artificial Intelligence can be used to assess and evaluate the language of the contract while adding new contracts to your contract management system and at the same time even screening the old contracts periodically for sensitive data. 

By utilizing this kind of analysis continuously, one can identify potential risks in its early stages of the contract and also monitor the agreements after the fact. Machine learning, VISDOM AI and the Cobble stone’s proprietor tool helps the professionals with the task of identification of the risks thereby eliminating long hours of dreaded contract review and analysis. For instance, VISDOM gives an opportunity to the Insight users of the contract to significantly reduce contract risks. Whenever we add a new contract to CobbleStone’s Contract Insight™, VISDOM helps in identifying the potential risk by analyzing the text of the document, thereby allowing the system to identify both good and bad language in a contract based on rules-based sentiment and risk-level ratings.

Creation of risk assessment strategy

one can create a risk assessment strategy by using three steps:

• Investing in smart contract management software.
• Determining those keywords, phrases, and clauses that your organization deems to be a “risk” to alert the users of sensitive data.
• Using smart tools within the software to analyze contract data and assess any risk associated with each contract.

Assessing the customer/client

Steps can be taken to research upon the history and reputation of the potential client. Having information about the client related to its nature or whether the project is the one which the client normally handles or it is her/his new area or market etc. All these factors will help us avoid risks. 

Allocation of risks

Contractual risk transfer can relieve the “transferer” by assigning it to one or more of the contract’s counterparties commonly referred to as the “transferees”.  Within a contract, risk transfer is primarily accomplished through a combination of indemnification/hold harmless, limitation of liability, and waiver of subrogation clauses which is explained as follows:

• Indemnification Clause- It is a clause where one or both the parties promises to pay the other for any kind of loss, damage, harm or liability that may arise from the contract. It’s a promise made by one party to hold the other party harmless against the losses caused by the actions of the first party. 
• Limitation of Liability- It is a clause that provides financial cap on the amount of liability or limits the liability to certain kinds of losses only, whether with respect to an indemnity claim or with respect to a breach or otherwise. It also restricts the types of loss recoverable, or the remedies available, or imposes a short time frame in which damages are recoverable. 
• Waiver of Subrogation- An agreement between two parties in which one party agrees to waive subrogation rights against another in the event of a loss. The intent of the waiver is to prevent one party’s insurer from pursuing subrogation against the other party.

Reviewing the contract for heightened risk provisions

Some contractual provisions like performance guarantees and bonds can increase the risk to one’s firms. These are usually difficult for professional services to provide. Another potential risk that can be considered is the risk of liquidated damages which are often related to schedule issues. These steps can help reduce risks in the long run.

Other steps

The duty of confidentiality clause which is one of the most important clauses in any contract must be extended to the security of the user names and passwords and it must be assured that the document of confidentiality is accessed by only authorized users.

Conclusion

The significance of electronic contracts has grown tremendously in the coming years due to the growth of technology. Infact, COVID-19 has led to the emergence of a new virtual world in which the legal field is no exception.  In order to control the rights and liabilities that would arise in case of electronic contracts, the Indian Legislature has also passed the IT Act, 2000 and the Electronic Commerce Act, 1998. 

The electronic contract tends to derive its powers from both cyber and contractual law. It is a noteworthy type of arrangement that has developed in the coming years encompassing all the traditional types. There are certain precautions that are required to be taken while creating and evaluating electronic contracts to avoid any risks. It can be rightfully said that despite having certain risks, online contracts have definitely added to the convenience to the lawyers.    

References

1. https://www.cobblestonesoftware.com/blog/assessing-contract-risk-early-identification-and-prevention
2. http://www.rmmagazine.com/2019/08/01/eight-steps-for-evaluating-contract-risks/
3. https://www.concordnow.com/blog/contract-risk-management/
4. https://rmas.fad.harvard.edu/basic-guidelines-contracts-and-contract-risk-management
5. https://www.upcounsel.com/online-contracts
6. https://www.mondaq.com/india/contracts-and-commercial-law/699022/validity-of-electronic-contracts-in-india
7. https://www.lawyersclubindia.com/articles/types-of-online-contracts-enforceability-and-validity–11077.asp 
8. https://www.dataprotectionreport.com/2018/11/browsewrap-agreements-are-you-covered/
9. https://blog.ipleaders.in/e-contracts-shrink-wrap-click-wrap-browse-wrap-agreements/ 
10. https://acadpubl.eu/hub/2018-120-5/4/377.pdf 

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: